General Partner Liable for Co-Partner's Fraud Against "Innocent Third Party"
The First Appellate District Court of Appeal held that where a general partner commits fraud before the plaintiff becomes a limited partner, all general partners are jointly and severally liable to the plaintiff as an “innocent third party.” Miske v. Coxeter (2012) 204 Cal.App.4th 1249.
However, whereas the assignee of the limited partner’s claim may recover damages for the general partner’s fraud, he may not avail himself of the attorney’s fee clause in the Limited Partnership Agreement (“LPA”) because the LPA does not automatically run with the assigned fraud claim.
II. BACKGROUND FACTS
In 1985, James Coxeter, Robert Bisno, and Trans-Action Financial Corporation (“TAFC”) formed a California limited partnership (the “LP”) for the purpose of redeveloping certain properties. Both men served as general partners of the LP, and solicited investments from third parties in exchange for limited partnership interests in the LP.
Mr. Bisno solicited and obtained investment in the LP from Haldir, Ltd. (“Haldir”). Mr. Bisno used fraud and deceit to induce Haldir’s investment, including misrepresenting the purchase price of a key asset and failing to disclose his embezzlement of $470,000 in LP funds. After its investment failed to produce results, Haldir sold its limited partnership stake to Berkeley Commercial Center, LLC (“Berkeley Center”). Once apprised of Mr. Bisno’s fraud, Haldir assigned its fraud claims to George Miske.
Mr. Coxeter performed his fiduciary duties to the LP faithfully, and was unaware of Mr. Bisno’s fraud until aggrieved limited partners sued the LP.
Mr. Miske sued the LP, Mr. Bisno and Mr. Coxeter for fraud in the inducement, and sought damages and attorney’s fees.
A. Liability for General Partner’s Fraud
All partners are liable for the fraud of a co-partner acting within the scope of his or her authority in a partnership transaction with an innocent third party. Stout v. Turney (1978) 22 Cal.3d 718, 723. However, in a limited partnership, innocent general partners are not liable to limited partners for the misdeeds of another general partner if the fraud is committed after the limited partner invests. Kazanjian v. Rancho Estates (1991) 235 Cal.App.3d 1621, 1624-1625.
In Miske v. Coxeter (2012) 204 Cal.App.4th 1249, Mr. Bisno’s fraudulent concealment occurred before Haldir purchased its limited partnership interest in the LP. “At the moment of purchase, Haldir is in the same shoes as any defrauded innocent third party purchasing a partnership asset. It had not yet retained any benefits from the partnership and had not yet begun operating under the LPA.” Id. at 14. The fact that a limited partner discovers he or she was defrauded by a general partner after becoming a limited partner is inconsequential where the fraud occurred when the limited partner was still an “innocent third party.” Thus, Mr. Coxeter is jointly and severally liable for Mr. Bisno’s fraud.
B. Scope of Assigned Fraud Cause of Action
Haldir assigned all “right, title, and interest in any and all of [its] claims and causes of action for the monetary losses sustained as a result of the fraud and deceit” of the LP and its general partners to Mr. Miske. Id. at 20. Haldir did not assign to Mr. Miske Haldir’s interest in the LPA containing the attorney’s fee clause. Nor did Haldir make any reference to Haldir as a limited partner in the assignment. Indeed, by the time Haldir assigned its fraud cause of action to Mr. Miske, it had already transferred its limited partnership interest to Berkeley Center. Thus, Mr. Miske was not entitled to attorney’s fees under the LPA.